The COVID-19 pandemic has upended life for all of us — and this is especially true for smaller businesses. We all know the precautions that we should take as individuals to be safe during the pandemic, but there are also precautions you should take as a business owner to help you outlast COVID, or at least to make sure your business finances don’t drag down your personal finances as well. Here are 3 key ways to protect your business during COVID.
1. Establish an LLC or Corporation ASAP
As much as I want you to keep reading this article, stop right now if you don’t have an LLC or corporation set up for your business or freelancing. This should literally be the first thing you think about today.
Having a limited liability company (LLC) or corporation is critical for any business of any size, even if you are just a sole proprietor, freelancer, or other independent contractor. If it’s your work, then you need this protection.
Why? Because a limited liability company does exactly what the name says: it limits your liability. It means that even if something goes wrong with your company— an unpaid invoice, unpaid rent, a contractual relationship that went sour, or even the failure of the business — then as a general rule, only the business is liable, not the business owners or managers. Corporations have the same effect.
Without an LLC or corporation, you are personally liable for anything that goes wrong with your business or work. Read that sentence again. Personally liable — this means a vendor or business partner could come after your personal and family assets, whether you have a house, a car, savings, even your future wages or income. This includes anything belonging to a spouse too.
Then, once you have an LLC or corporation, make sure you keep your business assets separate from your personal assets. Get an employer identification number (EIN) from the IRS — it only takes a few minutes on the IRS website for most businesses — and then get a separate bank account. Commingling your business and personal assets can result in your business being deemed a mere “alter ego” of your individual self. (While that may make you sound like a superhero with a secret identity, in this case, it’s not a good thing.)
Setting up an LLC or corporation sounds like a lot of work and expense, but there are cost-effective options available. Some states make it easy to set up what’s called a single-member LLC. Most importantly though, do not consider this an unwanted expense. Consider it insurance against a dangerous risk.
Even if COVID means needing to close your business or to defer paying certain bills, don’t let your business threaten your personal finances. Protect your business before its too late.
2. Get Key Business Relationships in Writing
COVID has fundamentally changed the way we work, perhaps forever. While handshakes were once a meaningful — and sanitary — way of establishing professional relationships, they are no longer sufficient, especially if the circumstances require you to part ways from them.
If your agreements and arrangements aren’t in writing, you’re taking on another avoidable risk.
Secure and protect your business relationships with a contract and/or terms of service document.
Whether it’s a contract, an Operating Agreement, corporate Bylaws, or Terms of Service and a Privacy Policy for a website or app, these documents clarify your relationships with partners, vendors, team members, and customers.
There are a number of key elements to consider:
- Payment: When and how will payments happen?
- Scope of work: What work are you doing for the other party? What work is the other party doing for you?
- Governance: For an LLC’s Operating Agreement or a corporation’s Bylaws, who has the power to make decisions? How will voting work?
- Term and Termination: How long will the relationship last? Is it renewable? How and when can the relationship be terminated and under what conditions?
- Confidentiality: How will your confidential information remain confidential?
- Liability: Are there limits to liability for any of the parties?
- Intellectual Property (IP): How can you ensure that all of your business’s IP belongs to your business?
Defining these elements in writing gives both parties transparency and protection from a sticky situation — especially if anyone needs to walk away right now because of COVID. And even if the relationship is doing well right now, putting everything in an agreement is the smart thing to do. You can strengthen the relationship by letting everyone know where they stand, and you can find problems before they arise.
3. Keep Up with Unemployment Benefits
Throughout the pandemic, companies of all sizes have reduced their workforce to stay afloat. While letting people go is never easy, reading up on your state’s unemployment benefits can make the process smoother.
If you have to part ways with any of your team, take the time to sit down with them. Explain the situation and let them know you were out of other options given COVID and the recession. And then walk them through the unemployment benefits available — specifically in the state where the worker lives. The rules vary from state to state, and the federal government has been providing extensions and additional funding, so make sure you research the latest updates.
One specific pitfall to avoid: a lot of people will want to classify their departures as voluntary, wanting to avoid the label of being fired. But in most states, a “voluntary quit” makes you ineligible for unemployment benefits. Plus, while it is true that many employment applications require candidates to say if they have ever been fired from a past job, there is typically an opportunity to explain what happened — that it was COVID and the economy rather than a performance issue.
While saying goodbye is painful, staying up to date on unemployment benefits can make this difficult situation slightly easier.